The goal of the S&P U.S. High Yield Low Volatility Corporate Bond Index is to construct a high-yield bond portfolio with low credit risk and low return volatility by applying a low volatility factor. Does the index methodology truly deliver the effect of reducing volatility? The back-tested results of the 17-year period ending Feb. 28, 2017, show that the S&P U.S. High Yield Low Volatility Corporate Bond Index may offer an intersection that bridges the volatility gap between the high-yield and investment-grade bond sectors, with increased return efficiency.
Exhibit 1 shows annualized volatility across the equity and fixed income sectors from Jan. 31, 2000, (the first value date of the index) to Feb. 28, 2017. As expected, the S&P U.S. High Yield Low Volatility Corporate Bond Index sat between the high-yield and investment-grade bond sectors in the volatility spectrum.
Exhibit 2 illustrates the return/volatility trade-off among various sectors. The fact that the S&P U.S. High Yield Low Volatility Corporate Bond Index is located above the straight line linking the investment-grade and high-yield bond sectors demonstrates that the index outperforms the return frontier established by the two bond sectors. This increased return efficiency can also be seen from the S&P U.S. High Yield Low Volatility Corporate Bond Index’s higher ratio of return-to-volatility than that of the broad-based, high-yield index (see Exhibit 3).
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